The Treasury Department announced Wednesday that it plans to withdraw proposed estate and gift tax regulations under Section 2704 in their entirety. In the Treasury’s own words, the proposed regulations “would have hurt family-owned and operated businesses by limiting valuation discounts.”
The goal of the proposed regulations was to counteract changes in state statutes and developments in case law that have eroded Section 2704’s applicability and facilitated the use of family-controlled entities to generate artificial valuation discounts, such as for lack of control and marketability, and thereby depress the value of property for gift and estate tax purposes.
However, the proposed regulations, which faced widespread opposition, would have made it difficult and costly for a family to transfer their businesses to the next generation. Those commenting warned that the valuation requirements of the proposed regulations were unclear, could not be meaningfully applied, and could have produced unrealistic valuations. The Treasury further stated that the proposed regulations could have affected valuation discounts even where discount factors, such as lack of control or lack of a market, were not created artificially as a value-depressing device.
The Treasury Department and IRS must issue a formal notice of withdrawal, to be published in the Federal Register in the coming days. To read the full text of the “Second Report to the President on Identifying and Reducing Tax Regulatory Burdens,” visit https://www.treasury.gov/press-center/press-releases/Documents/2018-03004_Tax_EO_report.pdf